Opinion: US-China rift puts US-listed Chinese stocks against a great wall — and investors will pay a price – Community News
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Opinion: US-China rift puts US-listed Chinese stocks against a great wall — and investors will pay a price

The Securities and Exchange Commission is making it harder for Chinese companies – and their US shareholders. I’m referring to the agency’s recent threat to cut Chinese stocks traded in the US if they don’t make their accounting and auditing data available for inspection by the US Public Company Accounting Oversight Board (PCAOB).

The reason the SEC threat could be counterproductive: Chinese companies may not need US financial markets. Given China’s goal of making its exchanges the center of global financial markets, the SEC threat could play into China’s hands. Beijing would like nothing more than US stock exchanges to see the listings of leading global brands such as Tencent Holdings TCEHY,
+2.19%
and Alibaba Group Holding BABA,
+1.57%.

DiDi Worldwide DIDI,
+7.95%,
the Chinese ride-hailing company, seems to be a good illustration of this possibility. The company has come under pressure from the Chinese government to delist its shares from the New York Stock Exchange, and last week it announced it would do so. The resulting headline in The New York Times read: “With his exit, DiDi is sending a signal: China no longer needs Wall Street.”

DiDi’s delisting announcement came on December 2. At one point in pre-open trading the following morning, the stock was up more than 10%. Although the stock subsequently closed in December 3 trading, it is notable that the stock’s immediate reaction to the delisting announcement was a rally.

DiDi Global is just one example. But consider the 10 largest US-listed Chinese companies with American Depositary Receipts (ADRs). The table below shows their returns on December 2, the day the SEC announced its new rules. As you can see, four out of 10 were up that day, and the average of all 10 was down just 0.7%. This data hardly tells a story for investors who are mostly concerned about the implications of the SEC’s latest move.

Business

ticker

Performance December 2

Tencent Holdings

TCEHY

+1.0%

Alibaba Group Holding

BABA

-0.4%

Chinese construction bench

CICHY

+2.5%

Meituan

MPNGY

+1.3%

JD.com

JD

-0.8%

NetEase

NTES

-3.9%

pinduo duo

PDD

-4.6%

Wuxi Biologics

WXIBF

-4.8%

Ping an insurance company from China

PNGAY

+2.5%

Xiaomi

XIACF

-0.2%

AVERAGE

-0.7%

Certainly, the smallest Chinese companies with ADRs underperformed the largest. That makes sense, Andrew Karolyi told me in an interview. Karolyi is a professor of finance at Cornell University and dean of Cornell’s Johnson School of Business. His reasoning: The smallest Chinese companies will probably have a harder time than the largest companies to access markets outside the US, at least for now.

In line with this hypothesis, the worse performance on December 2 of Chinese electric vehicle companies. While their market value is significant, they are not as big as the top 10 listed in the table above. As you can see below, their average return that day was a loss of 3.1%.

Business

ticker

Performance December 2

NIO Inc. Sponsored ADR Class A

NIO

-5.5%

XPeng, Inc. ADR sponsored class A

XPEV

-5.6%

BYD Co. Limited Non-Sponsored ADR Class H

BYDDY

-0.1%

Li Auto, Inc. Sponsored ADR Class A

LI

-3.4%

Niu Technologies Sponsored ADR Class A

NIU

-1.1%

AVERAGE

-3.1%

The price of politics

The policy of subjecting these companies to PCOAB oversight is separate from the merits of the SEC’s demand. It’s hard to argue with SEC Chair Gary Gensler’s assertion, in an SEC press release last week, that “if you want to issue public securities in the US, the firms that audit your books must be subject to inspection by the Public Company.” Accounting Oversight Board (PCAOB)… The accountants of foreign companies accessing the US financial markets [must] play by our rules.”

The SEC’s frustration is understandable. The PCOAB was established in 2002 with the passage of the Sarbanes-Oxley Act, so efforts to convince China to allow inspections have been going on for nearly 20 years now. If China never wanted to reach an agreement in the first place, the SEC has been negotiating in vain for two decades. Who wouldn’t be frustrated?

Nevertheless, Karolyi told me he believes an agreement with China on the inspections is more likely to be reached through “quiet and deft diplomacy” between the two countries’ securities regulators. He lamented that the situation has degenerated into public threats, as investors will eventually pay the price.

That price is paid in at least two ways. First, it will be more difficult for US-based investors to gain exposure to individual Chinese stocks. Without ADR, you can only invest in a Chinese company by buying common stock on a Chinese stock exchange. That entails the additional transaction costs for exchanging dollars into Chinese currency.

You could characterize this as mere discomfort. The higher price, according to Karolyi, is the greater uncertainty about a company’s governance and its financials that buyers face on local exchanges. By contrast, when a company is listed on a US stock exchange, Karolyi says, it “sends an important signal that it can withstand scrutiny.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings keeps investment newsletters that pay a fixed fee to be audited. He can be reached at [email protected]

Also read: List of concerns about Chinese stocks gets longer

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